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Analysts cautious on corporate earnings growth amid Covid-led lockdown

Analysts are becoming increasingly cautious and have started trimming their expectations of corporate earnings growth in FY22 amid the second wave of Covid infections, which have triggered lockdowns and mobility curbs in key cities of the country.


A prolonged and wider lockdown will have a more severe effect on earnings recovery, according to ratings agency Moody’s.


Largely regional and less stringent lockdowns have had a limited impact on economic activity, analysts say, but caution that if infections fail to decline to more manageable levels, lockdown may be prolonged and increase in scope, leading to a more severe effect on earnings recovery.


However, once the restrictions put in place are gradually lifted, the fortunes of India Inc will start improving, they say.


Tata Steel and JSW Steel have diverted part of their oxygen production towards medical use amid shortages, but their large oxygen-producing plants will limit the impact on steel production.


“Housing and car sales will decline sequentially in the June quarter but will likely recover once infections subside. Reduced mobility will weaken transportation-fuel demand and lower refiners’ capacity utilisation. Global demand could prompt Indian steel-makers to export their domestic surpluses. A slowdown in construction activity will reduce cement consumption -- the growth in FY22 may be lower than our earlier 10-12 per cent growth forecast,” wrote Vikas Halan, associate managing director at Moody’s in a co-authored report.


Kaustubh Chaubal, Moody’s vice-president and senior credit officer, said strong global demand could boost exports by steelmakers, given the relatively weak demand from automotive and white-goods manufacturing in the current quarter. Exports are, therefore, an attractive opportunity because domestic steel prices are lower than international prices.


During the first wave, FY21 and FY22 Nifty earnings estimates, according to analysts at Jefferies, were cut by 33 per cent and 21 per cent, respectively, till September 2020.


Subsequently they were upgraded by 13 per cent/9 per cent and the net impact was -24 per cent/-14 per cent respectively. They, however, caution that the consensus has been slow in cutting earnings estimates and earnings cuts will likely extend well into the June 2021 results season, i.e., going until August 2021.


“Retail, autos and other consumer discretionary, financials, industrials, realty and staples will likely lead earnings cuts. Global facing cos viz. IT services, pharma, metals, auto ancillary may not see any earnings cuts,” wrote Mahesh Nandurkar, managing director at Jefferies in a coauthored report with Abhinav Sinha. Maharashtra, Karnataka, Kerala, Uttar Pradesh, Tamil Nadu, Delhi, Rajasthan, and West Bengal have accounted for around 64 per cent of the daily infections since April 25, reports indicate. These states, according to Moody’s, together accounted for almost 60 per cent of India’s gross domestic product (GDP) over the last four fiscal years through March 2020.


In this backdrop, leading brokerages and rating agencies, including Moody’s, Nomura, Crisil, QuantEco Research and CARE Ratings, have already cut India’s FY22 GDP growth estimates by up to 32 per cent.


Gautam Duggad, head of research for institutional equities at Motilal Oswal Financial Services, said: “The interplay of the resurgence in Covid cases and the pace of vaccination would decide the trajectory of economic recovery.”

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